By W. Michael Cox and Richard Alm
Nov. 8 (Bloomberg) -- A slim majority of Californians did
something strange on Election Day. They voted to make themselves
worse off while boosting the economies of Texas, Arizona, Nevada
and other states.
They did this by passing Proposition 30, the brainchild of
Democratic Governor Jerry Brown. The ballot initiative raises
the sales tax from 7.25 percent to 7.5 percent and imposes
higher income-tax rates on many Californians. The top marginal
tax rate goes from the current 10.3 percent to 13.3 percent, one
of the highest in the nation. The higher income taxes will lapse
in seven years -- but are retroactive to Jan. 1, 2012!
In Proposition 30, Brown entreated Californians to join him
in a soak-the-rich scheme, sold as a panacea for the state’s
financially stressed school systems. However, Proposition 30
will hit almost all Californians. Both rich and poor families
will pay higher sales taxes. One recent study found that
millionaires don’t move from California to avoid income taxes --
but Proposition 30’s threshold starts at $250,000, imposing new
burdens on thousands of already heavily taxed families.
Many beleaguered taxpayers are going to decide they’ve had
enough and head for other states that don’t impose as heavy a
tax burden. The California weather and lifestyle just aren’t
worth the higher price they now have to pay for it.
So, welcome to Texas: The weather isn’t as good, but you’ll
have more money to spend.
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Reverse Migration
For most of its history, California was the Promised Land,
and newcomers arrived in droves. More recently, however,
California’s migration patterns have begun to reverse. According
to Internal Revenue Service data, net migration from California
to other states totaled 865,444 people from 2004 to 2010, the
highest in the nation.
Think of it this way: The equivalent of the entire city of
San Francisco packed up and left California in six years -- and
that’s with taxes lower than they will be under Proposition 30.
Where are the Californians going? For the most part, it’s
to states with lower individual income taxes. Texas, a state
with no income tax, leads as a destination, with a net inflow
from California of 185,122 people from 2004 to 2010, the IRS
data say. Next come Arizona (top income-tax rate of 4.5
percent), Nevada (no income tax), Oregon (11 percent) and
Washington (no income tax). In the top 15 destination states for
ex-Californians, the migration-weighted average of the highest
marginal tax rate was just 3.9 percent.
The attraction of lower taxes is powerful. In our detailed
study of migration among states, top personal income-tax rates
were one of six crucial factors that explain two-thirds of
interstate population shifts. The others are right-to-work laws
(versus mandatory unions), the relative growth rate of
government spending, housing prices, the quality of public
schools and climate. With the exception of the weather,
California doesn’t rate highly on any of them.
Arthur Laffer gave us his namesake “curve” that shows how
raising taxes at some point discourages enough economic activity
to actually reduce government revenue. The ease of migration
within the country suggests the Laffer curve is sharply lower
for states than for nations. It also follows that a state’s
revenue-maximizing tax rate will decline over time because
people are able to overcome the non-tax barriers to finding
cheaper places to live.
California may get a short-term boost in revenue, but the
state’s long-term problem is too much spending. Once Proposition
30 taxes expire, California’s finances will be in worse shape
than ever. The government will be just as big or even bigger,
but because of migration to other states, California will have
fewer taxpayers to foot the bill.
Texas Model
What then? Does California extend the higher rates? Raise
taxes even higher, chasing off even more citizens? Face up to
its fiscal problems? By that time, of course, Brown will be gone
from office -- so it will be someone else’s problem.
If California wants to reverse the out-migration, it should
be lowering taxes, cutting spending and encouraging economic
growth. That’s the Texas approach.
The passage of Proposition 30 will only make more
Californians consider moving to Texas and other states. How many
San Franciscos does California have to lose before politicians
to come to their senses?
(W. Michael Cox is director of the William J. O’Neil
Center for Global Markets and Freedom at Southern Methodist
University’s Cox School of Business. Richard Alm is writer-in-
residence at the center. The opinions expressed are their own.)
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